It’s now time to regulate invoice discounting


Recently, a friend lost 10 lakh on a seemingly safe asset, i.e., invoice discounting. She has a finance background and is unlike most retail investors who do not understand the risks of exotic financial products. She had invested via an online platform towards discounting an invoice payable by a leading e-commerce company. However, the e-commerce platform found some of the earlier consignments from the concerned seller defective and withheld the payment of this invoice. As an investor, my friend had no recourse to the defaulted amount.

Invoice discounting for retail investors is an unregulated space. The Reserve Bank of India (RBI) has created trade receivables discounting system (TReDS) to regulate invoice discounting among micro, small and medium enterprises (MSMEs), large corporates, and financiers. Retail investors seek unregulated online platforms that offer attractive returns through invoice discounting. My friend’s experience has valuable learnings for other retail investors.

Retail investors often perceive invoice receivables as substantial collateral that guarantees capital protection. On the contrary, an invoice receivable is an operational debt. Corporate buyers can delay payments against such invoices without any impact on their credit rating. Even a well-known corporate buyer may raise disputes and withhold payments against invoice receivables. Some online platforms claim they only offer invoices accepted and approved by buyers for discounting. But there are plenty of cases where the buyer has denied the payment on the due date. Retail investors must bear the losses without any downside protection in these situations.

My friend used the corporate reputation of the buyer as a proxy for payment guarantee. However, even reputed companies fail to honour their invoice payment commitments on time. In two recent cases, investors approached courts to seek relief under the Insolvency and Bankruptcy Code (IBC). However, the courts held that these dues are ‘operational’ debt’, with a lower priority than financial creditors, e.g., term loan lenders. Delays and defaults may not always be intentional from the buyer’s side. But, when the buyer and seller engage in a protracted dispute, the investor has no choice except to wait.

TReDS offers protection and recourse mechanisms to institutional financers. For example, they may take insurance to limit the default risk. Moreover, if the buyer defaults, the entity is reported to the credit bureaus concerned . Any entity reported as a defaulter finds it difficult to transact on a credit basis in the future. Therefore, on TReDS, a buyer has a clear disincentive to dishonour the invoice payable. Since retail investors tap invoice discounting through unregulated platforms; they do not have any insurance or recourse mechanism for downside protection. In other words, they take exposure to completely uncovered assets without complete understanding.

Over the last few years, RBI has put the safety and interest of end consumers at the highest priority. The regulatory changes in the payments, BNPL, and many other spaces testify to this effort. Once again, the regulator has the opportunity to protect retail investors exploring invoice discounting on unregulated platforms. There are two practical ways to do it. First, the regulator can allow retail investors to access the invoice discounting market through OBPPs, or online bond platform providers. OBPPs are already regulated by Sebi and have built a steady base of retail investors seeking arbitrage in the debt-investments. With some protective guard rails by RBI and Sebi, they can be ready to safely extend investment in invoice discounting for retail investors, with due recourse. The other way is to permit retail investors to participate in the TReDS ecosystem. The platform offers robust risk management, reporting and recourse mechanisms against defaulting buyers. The same can apply to retail investors. Either of these measures will deepen the market for debt financing and reduce the systematic risk for retail investors.

Anshul Gupta is co-founder and chief investment officer, Wint Wealth

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Updated: 13 Aug 2023, 09:27 PM IST

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